If you are new to the stock market, then you must have heard the term Market Capitalization many times – which is also commonly known as Market Cap. This is important data to be seen before investing or trading in any company, which affects the decision of every investor. So today in this post we will know what is Market Cap, how it is calculated, and why it is so important?
What is the market cap?
The market cap simply means the total market value. Which is calculated by multiplying the total number of outstanding shares issued by that company by the current running Actual Share Price. This shows the size of the company, with the help of which the investor can estimate the future potential and invest keeping in mind the risk and reward.
For example: If currently the price of 1 share of Reliance is ₹ 200 and a total of 10,000 shares are issued by Reliance, then the total market cap of Reliance will be = ₹ 20 lakh (₹ 200 × 10,000)
How is the market cap calculated?
It has a simple formula – [Market Capitalization = Current Share Price x Total Outstanding Shares]
[Market Capitalization = Current Share Price x Total Shares Issued by the Company]
Current Share Price – The running price of any company during the open market (9:15 am to 3:30 pm) is called the current share price. It keeps on changing based on demand supply, company growth, financial data, and many other factors.
Outstanding Shares – Outstanding Shares means the total authorized shares issued by the company which is available to all types of investors, promoters, officers, employees. This does not include Treasury Shares that have been bought back by the company.
What are the types of market cap?
To compare any company, Market Capitalization has been divided into total 3 parts –
1. Large Cap
Those companies are included under large-cap companies whose total market capitalization is more than ₹ 20,000 crores. Where are they usually known as Blue Chip Stocks, which have been performing very well in the stock market for the last one or two decades and provide consistent returns to the investors?
Such companies remain stable even during a recession and maintain themselves in profit. Presently more than 180 companies are listed in the Indian stock market as Large Market Cap companies. For example, in Nifty 50 companies, all the companies come in large-cap only.
2.Mid Cap
The market cap of these companies ranges from ₹ 5000 crores to ₹ 20000 crores.
It is a bit risky to invest in these companies due to higher volatility as compared to large-cap.
But talking about the other side of the coin, then these companies are considered as Near Leader and seeing the future potential, there are more chances of high growth in long-run and becoming a large-cap company.
Companies like LIC Housing Finance and Castrol India are an example of this.
3. Small Cap
In the stock market, 80% to 90% of the total listed companies are Small Cap Companies, whose market cap is less than Rs 5000 crores. Due to their small size, their growth potential is also high, due to which most of the retail investors invest in it.
But the truth is that due to the small market cap, there is a lot of volatility and risk in it, due to which it is not able to keep itself stable in the negative market and goes down.
Why is market capitalization important?
Market cap shows the actual size of any company so that investors can compare the two companies to find out the Risk-Taking Ability and take the right investment decision. Along with this, the market cap has a direct connection with the company's growth, future prospects, and returns, i.e. higher market cap = better growth prospects.
It is seen in most cases that large-cap companies give a stable return with less risk.
While small-cap companies have high risk but no return can be predicted.
FAQ's
Q.1 What is Free Float Market Capitalization?
Ans: Free float market cap is calculated on only those shares of the company which is available to trade on the stock exchange. It does not include those shares which are held by an executive of the company or by a government institution and a private company.
Q.2 Which market cap is better between high and low?
Ans: It depends on different investors.
If you want a good return with low risk then you should invest in large-cap companies.
On the other hand, if you want to earn high returns by taking high risk, then you can invest in a small cap.
[Note – We do not recommend anyone to invest in Small Cap, as it is very risky]
Q.3 What is the difference between Market Cap and Enterprise Value?
Ans: Market Cap tells the total value of the company which comes after multiplying the total issued shares and the share price.
Its formula is [Market Capitalization = Total Outstanding Share x Share Price]
Enterprise Value reflects the real value of the company which is calculated by adding debt to the market cap and subtracting cash.
Its formula is [Enterprise Value = Equity Value + Debt. + Chosen Stock + Interest – Cash]
Q.4 Does the market cap change daily?
Market capitalization is obtained by multiplying the total shares and the share price.
In such a situation, there are small changes in the share price of every company every day, due to which the market cap also keeps on changing.
For example: Suppose the total shares of HDFC Bank is ₹ 10 lakh and its share price on April 1 is ₹ 10, so its market cap will be ₹ 1 crore. But on April 2, if its share price increases to ₹ 11, then its total market cap will also increase to ₹ 1.1 crores.
Q.5 Does everything but a company has a market cap?
You can calculate the market cap of every valuable item. For example, NSE & BSE, which is a stock exchange, also have a market cap.
Q.6 Are Small Cap Stocks and Penny Stocks the same thing?
Those companies whose total market value is less than ₹5,000 crore are called small cap. Whereas those companies whose share price is around ₹ 10 to ₹ 50 are called Penny Stocks.
Many times a company can fall in both these categories but its calculation is different.
Q.7 What is Market Cap to GDP Ratio?
Ans: This ratio is used to compare the market on a level like undervaluing or over-value.
75% to 100% is an average ratio, while more than 100 is considered overvalued.
Talking about the Indian Share Market, in March 2021 this Ratio was 189.5 %.
Conclusion
In this post, we have learned what is market cap and how important is it.
Along with this, we have also talked about many other important facts.
You can tell us in the Comment Box below how helpful you found this post.
Plus how the market cap is influencing your investment decisions.